Closing the Box on Pandora?

Posted on Apr 24, 2007

On April 16, three men—a retired bankruptcy judge from Alabama, a former litigator with expertise in transportation industry economics and a career attorney for the Copyright Office—made a decision that has profound implications for the future of webcasting, and for the music and Internet industries in general.

These three judges on the recently empaneled Copyright Royalty Board decided to raise webcasting royalty rates drastically, to levels proposed by SoundExchange, a digital music collecting society presided over by record labels and musicians unions. Specifically, the board’s ruling denied webcasters’ requests for a stay and a rehearing, effectively closing the door on further deliberation over the royalty rates and requiring that webcasters begin paying the new rates by May 15 of this year, due retroactively from the beginning of 2006.

Supporters of this decision argue that these new, higher royalty rates will ensure that musicians are paid fairly for their work as the music industry shifts its focus from traditional media to the Internet. Currently, record labels and recording artists don’t receive any royalties at all from terrestrial radio, which is required to pay only composers and publishers. However, detractors argue that the new rates are ruinously high and will lead to bankruptcy for the vast majority of webcasters, eliminating a resource that entertains more than 70 million Americans and financially supports tens of thousands of recording artists.

In order to learn more about the webcasting business, and the potential effects of this ruling, we spoke with Tim Westergren, the founder of popular Internet radio provider Pandora and one of the most vocal proponents for lower webcasting royalty rates.

Aram Sinnreich: What, exactly, is Pandora, and how does it work?

Tim Westergren: Pandora offers personalized radio over the Internet. The secret to our product is the music genome project, which is this enormous collection of songs that have been musicologically analyzed, each along close to 400 musical attributes, by a team of 50 trained musicians. We use this musical DNA to connect songs and create playlists.

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We launched the radio service in November 2005, and in the past year and a half we’ve accumulated close to 6.5 million registered listeners.

Sinnreich: What’s Pandora’s business model? How do you make money?

Westergren: It’s advertising-supported. Our primary costs are licensing and streaming, and the core personnel. But a business like ours scales, so the whole thing is, build a large listener base, and then you start to get the advantages of scale. We sell visual advertising right now, and we recently experimented with audio ads. But we haven’t made any decision about whether that’s something we would pursue long-term.

I can’t tell you too much about our financials, but we’re not profitable right now, and [until the CRB ruling] we were looking at a year or two from now being able to turn a profit. It’s a relatively small-margin business, and it’s all about getting a big audience.

Sinnreich: What are the new webcasting rates, and how do they affect your bottom line?

Westergren: As a webcaster, we pay a performance royalty for every song that we stream. It’s a royalty that’s not paid by terrestrial broadcasters, and is paid at a much lower rate by satellite broadcasters. Until this ruling, the rate that we paid was 1.17 cents per listener-hour, which equates to about 0.076 cents per song streamed to each listener.

The new rates, which are retroactive to the beginning of 2006, are immediately higher than that. They go from 0.076 to 0.08 cents per song, and then they go up incrementally over the subsequent five years. And by the end, they’re at 0.19 cents per song. That’s close to a tripling.

Economically, these new rates will represent 70-80 percent of gross revenues for folks like us, as opposed to only about 25 percent today. So they make the business completely uneconomic. There’s nobody that can deliver an advertising-supported webcast at those levels, because advertisers won’t allow us to raise rates high enough to cover it.

When you consider that satellite radio providers pay between 5 and 7.5 percent of gross revenues for the same thing, it seems especially unreasonable.

Sinnreich: As of May 15, you’re going to owe higher royalties retroactively to January 2006, due in one lump sum. How big is that check going to be?

Westergren: I can’t tell you specifically, but the near-term impact is many millions of dollars.

Sinnreich: What do you think the impact of these new rates will be on the Internet radio industry as a whole?

Westergren: If these new rates really stick, it’ll stop. No legitimate webcaster can afford to stream. There may be a few large terrestrial stations that keep their streams going online as a loss leader, but the whole business and ecosystem around Net radio is really going to be wiped out.

On the other hand, there are 70 million Americans currently listening to radio over the Internet. If you suddenly turn it off, the demand doesn’t go away. More Web radio will start sprouting up from countries where royalties aren’t strictly enforced, and people will start tuning in to them.

Sinnreich: The RIAA and SoundExchange argue that higher rates are necessary in order to adequately compensate recording artists as CD sales and other traditional music channels continue to lose customers to the Internet. What’s your take on this?

Westergren: I’m a musician myself, and I’m a huge fan of paying artists for their work. Our position is that we’re happy to pay it, but it has to make sense for the business. You’re right—CD sales are really dropping dramatically, and there’s a fair bit of panic going on. But that’s coupled with a serious misperception about the economics of online radio. SoundExchange and the RIAA say that since Internet radio’s getting bigger, a bigger piece of the webcasting pie needs to go to artists. In reality, revenue might grow, but that doesn’t mean it’s going to become much more profitable. You can’t squeeze blood from a turnip.

Sinnreich: So you don’t think they’re malicious so much as misinformed.

Westergren: They’re definitely misinformed. But there’s another piece of the story. Half of the money we pay to SoundExchange each month goes to the labels, and half goes directly to the artists. If these new rates do stick, then the only way webcasters will stay alive is to start striking direct licensing deals, at lower rates, with the major record labels. If those deals are struck, then all of that money goes directly to the label, and goes under the umbrella of traditional record deals, where only a very small percent ends up going to artists.

Sinnreich: So you believe that one of the strategic reasons the RIAA has for supporting these higher rates is so labels can offer a competitive lower rate directly to webcasters, which would mean more income overall for labels and less income for artists?

Westergren: That’s exactly right.

Sinnreich: That sounds pretty nefarious.

Westergren: It’s business. These are businesses that are struggling, and they’re trying to maximize revenue.

Sinnreich: Have you seen any evidence of labels making direct deals with webcasters?

Westergren: SoundExchange just announced that they’re happy to let the RIAA deal directly with webcasters. Labels, throughout this process, have also been soliciting deals on the side. And they’ve already signed some—[popular webcaster] Last.fm signed a couple.

Sinnreich: Some have argued that the labels might also negotiate lower rates in exchange for promotional concessions from webcasters—the kind of thing that’s sometimes referred to as “payola” in terrestrial broadcasting. Would Pandora consider such an arrangement?

Westergren: Pandora has never, ever taken money to play music, and we never will. Labels have certainly offered, and I don’t think that’s nefarious—it’s the same as buying a billboard, or an end-cap [a type of display] in a record store. I think that is undoubtedly part of the motivation for direct licensing deals, and I wouldn’t be surprised if there were a promotional element to many of those deals. And that’s just business.

The problem is that listeners lose out. What’s being killed here is this channel that’s a wellspring of discovery and deep catalog and music-centric programming. And to my mind, it’s the future of music, and the only hope for it. And if it gets bottled up and stuck in these kinds of deals, it’s going to wind up being more of the same of what you already have.

Sinnreich: How deep is your catalog, and how much comes from the major labels?

Westergren: We have close to 600,000 songs now, and half the music we stream is independent of major label affiliation. And 70 percent of the songs we play come from albums whose Amazon music sales rank is 10,000 or lower. It’s indie, indie stuff.

Sinnreich: Some people would argue that if the market won’t support webcasting, it’s no great loss. If Pandora’s going to go out of business, who cares? This is an age of booming consumer access to a broad range of content. There’s digital terrestrial radio, mobile music services, satellite radio—why do consumers need Internet radio on top of that?

Westergren: That’s a fair question. The only answer to that is to look at how consumers respond. We’ve grown like a weed, and the only reason that’s happened, considering that we don’t advertise the service, is because there’s a need for what we’re offering. And I think that it’s going to grow faster and faster. And if you want to shut off these kinds of services, sure you can force people to be happy with what they have, but that doesn’t mean there’s not an appetite for a lot more.

Sinnreich: What’s Pandora going to do if the new rates stick?

Westergren: There’s a pretty good chance we’ll just turn it off, and give the money back to our investors.

Sinnreich: Fortunately for you, there are still some options on the table. You were involved in the recent launch of SaveNetRadio.org. Tell me a little bit about it.

Westergren: It’s a coalition led by webcasters—us, AOL, Yahoo, Live365, RealNetworks and a huge slew of smaller sites—and it includes many musicians and listeners as well. Its intention is to collectively solve the problem, and to marshal our respective audiences, directing that energy into congressional pressure to get a bill passed that will create parity between Internet radio and satellite radio.

We launched it on April 16, and had a quarter-million people sign the petition and contact their congresspeople in the first three days. And it’s continuing to grow. Pandora listeners are very energized.

I think musicians really need to pay attention to this, and not be passive, and get smart and get active. This is a watershed moment. There’s this budding vibrant online radio phenomenon that’s got massive energy and enthusiasm, and is growing in leaps and bounds. And it’s a new voice for the newly empowered creative class. Musicians are now able through technology to produce this huge volume of really good music. There’s no room for it in broadcast radio, but there is in this new medium. And it’s under threat right now, in a big way.

I have always supported the artists I enjoy. I have a wall with 3000+ CDs to support that claim. Even with the internet, it takes time to really look for new music that I like. Radio (terrestrial and satellite) is nearly worthless unless you listen to the top 40. Even listening to internet radio serving up a genre that nobody else plays is still too time consuming for finding new artists (albeit is much better than other radio). Pandora, which I just discovered, has given me a “to-buy” list from just passive listening that is orders of magnitude better than any other mode of music advertising that I’ve ever used. Even Apple iTunes is starting to think the same way with the Genius feature, even though it still isn’t anywhere near Pandora.

Regarding Music/Artists which/whom the Labels Do Not promote, carry, and especially broadcast - Danny Peck, a Los Angeles based musician is very much to the point with powerful to the point lyrics and acoustic music to carry the message to your heart. The following song is a message that is censored by the kind of legislation which prevents musical artists any venue for finding their audience.

I am presenting this not for purposes of “commercial” promotion but because the message of the song itself gets to the state of affairs when all of our freedoms are being taken away - it is a wake up call that these actions on the part of the record industry represent censorship behind the guise of business - People are putting their lives on the line for freedom and we have to search for evidence that anyone cares because the “public” forums belong to the corporate monoliths.

Took a train to New York city
Runnin’ from my own despair
Caught up in these crazy days
Fallin’ out of love affairs
I woke up to the sound of thunder
You could hear it everywhere
Put my ear down to the ground

Cuz there’s a war goin’ on, There’s a war, war, war, goin’ on

Mama’s leavin’ daddy cuz Daddy wasn’t happy
They’re both searchin’ for something they’ll
Probly never find
In this faithless society
With no respect for you and me
It’s drivin’ us out of our minds

Cuz there’s a war goin’ on , There’s a war, war, war, goin’ on

You didn’t join the army and
You don’t want to deal
Workin’ for the minimum
Tryin’ hard to feel like
You ain’t just another fool
A cog in their machine
That’s sucking the soul of everything

Cuz there’s a war goin’ on, There’s a war, war, war, goin’ on

Drive by shootings blow up
Blood stained t.v. shows
Where life is cheaper
Than bad writing
And thrown away like litter

While outside in the real world
People live on frozen streets
They stare at ya down to the bone

Cuz there’s a war goin’ on , There’s a war, war, war, goin’ on

Alcoholics ain’t anonymous
There’s addicts in the family
Dreamin’ of false promises
No one ever made
Envious of millionaires
But not a workin’ father
Whose left his whole life
At the gate

Cuz there’s a war goin’ on, There’s a war, war, war, goin’ on

Chemicals for pleasure
Chemicals for pain
Plastic derivatives
Styrofoam distributed
We’re livin’ on this toxic dump
Air is bad medicine
Ain’t it time we took back the sun

Cuz there’s a war goin’ on, There’s a war, war, war, goin’ on

And who will pay the price
And who will give their life
And who knows that there’s no place
Left to run

Soldier boys in desert heat
Leave behind these crooked streets
To kill and die for foreign oil
They’ll leave their hearts in dusty soil
The president loosens his tie
To get more comfortable with the lies
That he tells us again, and again, and again

Cuz there’s a war goin’ on, There’s a war, war, war, goin’ on

Body bags and unmarked graves
Robberies and murder rates
Unemployed and off to fight
Criminal or corporate types
Hollywood and Washington
Selling us another bomb
It’s goin’ off inside my head

Cuz there’s a war goin’ on, There’s a war, war, war goin’ on

And who will pray for peace
And who will cry for love
And who will still believe
In a world for everyone, everyone, everyone

Now I stand out on the street
Lookin’ for a heart or two
To come together, join together
Maybe build the world anew
Broken pieces fill our eyes
So many people sing the blues
But tell me, what else can we do

I am impressed with Westergren’s composure. What no one is directly addressing here is that the independent artists we discover on Pandora are the artists that the “Labels” do not “carry, represent, promote”. Prior to projects like Pandora the majority of these artists have been locked out by Corporations which otherwise buy them up and suck them dry (unless their product is commercial enough and the artist sets up a corporation in self defense)Otherwise the Labels appear to be bent on eradicating the competition of talent that doesn’t knuckle under to produce their mind control soliloquy muzak. If the Labels have their way our best artists will be under the thumb of the uni-think state that the culture is being numbed and dumbed into.

This is a freedom of choice matter which is being secretively legislated away. The newspapers are not working to keep the citizenry informed - rather to promote the corporate agenda. So much legislation is hammering away at our lives on so many fronts - that anyone who is paying attention is overwhelmed.

Artists who wake people up to the deeper truths of our circumstances and the plight of our planet and its inhabitants represent the most powerful medium for constructive inspired action and change. They aren’t very popular these days- even in the “indy” outlets.

This culture derides serious messages or attempts to nullify them with public relations campaigns that congratulate corporations for paying lip service to the state of emergency which is the current reality of humanity’s survival prospects.

As Danny Peck, LA based musician and one of my most beloved independent courageous musical artists has put it (in his independently produced CD and far too infrequent gigs… “Body Bags and unmarked graves ... There’s a War going on… There’s a war, war, war Going On!” I will post the words in a subsequent post (from Danny’s website) because they deserve to be heard, as does Danny- especially in these times. If for some reason they do not show up here the following link will take you to the song or you could listen to the mp3 on dannypeck.com .
( http://www.dannypeck.com/pages/lyrics/war.html )

I truly hope some of the readers of this website will listen. This is not meant to be a “commercial” promotion - the intent is only to bring a message that the industry does not promote, support - in fact it could be argued that the “music” industry is just one of many working hard to stifle the kind of message which follows. I hope some of you will take a few minutes to go to Danny’s site and treat yourself to something you might otherwise never have the remarkable opportunity to hear - a passionate activist who is also an awesomely talented musician bringing it all together.

While the words are powerful - it is the combination of Danny’s inspired acoustic music and passionate delivery that transport the meaning past the anesthetized lockdown of the mind to ignite understanding of what is being said.

I’m a big fan of streaming radio. I usually listen to yahoo music and other streaming stations. It’s a faublous way to discover new bands and sounds that I might never bother tuning into. I can’t be bother to download music from Itune I prefer commerical free radio.

hey all - I’m pandora’s music curator - just want to let everyone know that pandora isn’t going away yet, and that you can do something to help.

A new bill has been introduced in Congress that will set fair, sustainable webcasting rates. It’s essential that reps get phone calls from their constituents now, and get the message that people want them to co-sponsor this bill.

more details:

There is now a bill being introduced to Congress called the Internet Radio Equality Act, H.R. 2060. Simply put, it is designed to save Internet radio from obliteration.

I can’t even begin to list the # of artists I’ve discovered via Pandora. I don’t listen to any other radio format, esp. FM. Pandora has exposed me to music I KNOW I probably wouldn’t hear otherwise as well as helped me redisover artists I’d forgotten about. And yes, my cd purchases went from 0 to 5 or 6 in the past 6 mos. I’ve been listening. In fact, I’m going CD shopping Friday, thanks to Pandora. I can only hope I don’t wake up one morning to find them gone. It seems it’s out of our hands.

The mainstream recording industry is sinking fast, torpedoed by decades of executive greed and a complete lack of awareness of modern technology, and how to deal with it. They don’t give a damn about musicians or music, only profit. They are now grasping at any straw they can get their grubby hands on.

People aren’t buying CD’s because of vapid acts, overpricing, and a resistance to marketing hype. Internet radio is just a convenient scapegoat - one among many. The labels will blame their obsolescence on anything but their own greed and incompetence.

i have the perfect answer. i haven’t purchased or copied anyone’s music in 20 years. i have better things to do with my money. i have a collection of classical music,several hundred cd’s,all on labels that you have never heard of,none of them copy protected. the only time i ever copy any of them is to make a"mix”, for my own use. never give sony a dime, no product in my home with the sony label on it. internet radio,what a joke. i haven’t listened to a radio in 40 years.

Very true. I’m wondering how much money went into these judges’ pockets? But I’m sure the record industry will make it up. They’ll just take the money spent to insure this ruling out of the artist’s pockets.

But to be fair, the recording industry execs NEED 6 houses and $20,000 suits to impress everyone and show people how very successful they are, so even a tiny drop in income will sorely affect them, their families and the women who bonk them just to rub up to tubs of money.

Internet radio has given the record industry 15 sales in CD’s so far this year from me and my very meager income. Mostly for the reason that I hear music that reminds me of growing up and how I don’t have it around the house, so I buy the CD’s. It’s exposed me to different types of music that makes me say “WOW I gotta have that!” I don’t listen to the radio except in the car, but I listen to Internet Radio all the time in the house.

I know my lousy 15 CD’s won’t pay for anyone’s piece of fluff on the side, but without Inet Radio, I will utterly lack the motivation to buy any more music, or pass the word to friends about buying what I’m hooked on at the moment to buy the CD as well.

Music sales are in the toilet because the music is generally crap, people are TIRED of feeding the beast and being told it’s “our” fault that CD sales suck and we are no longer settling for one good song on an album full of garbage. We ain’t buying the hype anymore, people, and when Internet Radio goes dead, we ain’t buying the product either.

Who ever said that the federal court system isn’t every bit the corporate whorehouse that the Congress and White House are. Almost all sitting judges at trial and appellate levels are republican appointees.

What did you expect? That a federal judge would rule in favor of the little guy! Get real!